Three major publishers announced today that they'd agreed to settle a price-fixing case brought by the Department of Justice rather than face trial. The original lawsuit brought against the publishing houses alleged that they illegally colluded with Apple to raise e-book prices by forcing Amazon to adopt the so-called "agency model" of book pricing rather than the traditional wholesale / retail model used for virtually all other goods.

Hachette, HarperCollins, and Simon & Schuster have all agreed to suspend the agency model for two years as it's applied to new e-books and to compensate consumers for the higher prices their illegal collusion created. The DOJ is continuing its case against two other publishers, Macmillan and Penguin. The agreement must be approved by the US District Court in order to be valid.

A Sordid Tale

The critical issue here is who gets to set the price of e-books. In the traditional wholesale/retail model, the retailer controls the final price of the product. A company buys widgets wholesale and in bulk for $12.99, tallies their own costs, adds in a bit of profit, and sells the product for $16.99. The wholesaler can issue a manufacturer's suggested retail price, or MSRP, but this is only a guideline; the retailer can choose to sell a product for $1.99 or give it away for free as part of a promotion. Under the agency model, the publisher sets the final price and gives the retailer a percentage.

When e-books began to catch on and Amazon launched the Kindle, it adopted a flat $9.99 price point for virtually all new e-books. Publishers hated it. They were afraid that Amazon's price model would de-value their product and lead customers to expect e-books at a $9.99 or less price point. A great deal of FUD was written about how Amazon's existing model was bad for authors, ignoring the fact that author's made exactly the same amount of money per sale under either model.

Publishers proposed the new model and Amazon said no. Since Amazon had an effective monopoly on the e-book market, publishers went hunting for a new partner -- and found Apple. Apple was willing to use the agency model as leverage if it meant vastly expanding available content on iTunes and taking a stick to Amazon, its only real competitor. Amazon was forced to adopt the agency model after all the major publishing houses signed deals with Apple, and e-book prices subsequently rose. A number of Kindle books are now priced in the $11.99 - $14.99 range.

“Unlawful collusion and price-fixing not only violates antitrust laws, it is anti-competitive and inconsistent with the free market approach that is critical to our economy. In this case, competition was undermined when publishers colluded to artificially set prices that should have been determined by the free market, said Texas Attorney General Greg Abbot. "Today’s settlements provide refunds to customers who paid artificially inflated prices for E-books and prohibit publishers from colluding, so that retail price competition is restored within the E-book market."

But Bookstores Are AWESOME

The Author's Guild filed a recent brief with the court asking it to reject the proposed deal on the grounds that accepting it will continue to damage brick and mortar bookstores. The AG claims that "bookstores remain critical showrooms for works by new or lesser known authors and for entire categories of books, such as children’s picture books... allowing it [Amazon] to sell select e-books from three major publishers below cost -- even giving them away, if it sees fit -- will ensure the further decline of these critical players, diminishing readers’ choices in how and where they shop for books and narrowing the opportunities for new authors to be discovered."

This is a textbook example of viewing the problem the wrong way around. The question isn't whether or not Amazon should be allowed to set its own prices -- the question is why publishers should be allowed to illegally collude with Apple to raise e-book prices. For a further debunking of the FUD the AG and publishers have thrown up around this issue, see here.